Loan collections on securitized portfolios, which had taken a hit because of the second wave of the pandemic, are set to recover, a domestic credit rating agency said on Monday.

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India Ratings and Research, which tracks 154 securitisation transactions, said the collection efficiency on those loans had dropped to 69.2 percent in May from 82.8 percent in March.

"Improving economic sentiments, along with fiscal and credit stimuli are expected to support loan performance in the medium term. As businesses and consumer confidence continue to revitalise and stabilise, credit-fuelled consumption demand is expected to recover closer to 2HFY22," the ratings agency said.

Securitisation refers to an activity where a financier transfers future receivables on a loan or a bunch of loans to others which helps with immediate liquidity requirements.

With the coming of the second wave in April 2021 and renewed restrictions on mobility, collections in May 2021 were impacted among non-bank lenders. Asset classes such as microfinance, vehicle loans and tractor loans, where cash collections are significant for current and overdue collections, were largely impacted, the rating agency said.

"…with the wave of infections abating as rapidly as it had set in, the economic activity started to pick up in June 2021. The plateauing of infections in June 2021 and the consequent business confidence is expected to keep a check on the fall in collections to some extent in June 2021, across asset classes," it said.

Uncollateralised asset classes such as microfinance and unsecured personal or business loans continue to underperform as evident from the collection shortfall and delinquency build up in these segments, the agency said, adding that an increase in household leverage amid decreasing real income and increasing household expenses is expected to build up stress in the retail portfolio of lenders.

The agency called the RBI's move for microfinance lenders to focus on the household's total repayment capability across all indebtedness as a step in the right direction.

A significant part of delinquent loans in softer buckets will start performing with the gradual lifting of restrictions, but the delinquency build-up in deeper buckets are likely to stay weak due to pandemic setback among households and small businesses, it said.

The possibility of any further wave of COVID-19 infections and its effects on the performance of these transactions remains a key risk in the near term, as it could take a couple of months before the vaccination drive attains momentum across the country, it said